As always, the comment guide is at the bottom. You can just scroll down if you want.

Too Ape, Didn’t Read

This rule turns this:

Into this:

Here is what Citadel has to say:

So if we all comment together:

TLDR

The Order Auction Rule is “The Big One”. This is the one that bans PFOF without banning PFOF. It prohibits any firm, including Citadel, from directly internalizing order flow. They have to send your orders to a public auction where anyone could offer a better price. This is a big deal because it means that pension funds can interact directly with our (attractive) order flow, and the middle man (Citadel) is cut out. It also means that the centerpiece of Citadel’s entire money party is gutted and removed. That’s not all – it also prevents Citadel from fucking around with 4+ decimal prices, and prevents fee/rebate farming specifically for OUR orders. AND ON TOP OF THAT, it specifically includes things to combat time priority races, similar to IEX (i.e. it fucks over HFT shops like Citadel’s).

In short, this rule is a shot to the heart. This is the big one. This is the one they want to go away, above all the others. This is why they’ve been fighting so hard.

Do not let this opportunity pass you by.

Let’s go.

The Basics

Press Release: https://www.sec.gov/news/press-release/2022-225

Fact Sheet: https://www.sec.gov/files/34-96495-fact-sheet.pdf

Full Text: https://www.sec.gov/rules/proposed/2022/34-96495.pdf

Citadel’s Letter: https://www.sec.gov/comments/s7-32-22/s73222-20158676-326602.pdf

The proposed rule would PROHIBIT a restricted competition trading center from internally executing certain orders of individual investors at a price unless the orders are first exposed to competition at that price in a qualified auction operated by an open competition trading center (full rule text, summary section).

Execution priority requirements would, among other things, prohibit giving priority to the fastest auction response or to the auction response submitted by the broker-dealer that routed the segmented order to the auction.

This rule does a few amazing things:

1. Public auctions come before internalization.
2. Public auctions have execution priority rules that mess with HFT shops (like Citadel’s)
3. Dark pools, if they want to host auctions, must become transparent and start submitting data to public feeds.

Put simply, this rule labels systems like Citadel’s as “restricted competition trading centers” and firmly places them second in line for any order execution. Other exchanges that are actually open/lit are designated as “open competition trading centers” with transparency/open access requirements; these are firmly placed first in line for order execution.

Cirque du Citadel

Previously, we refreshed our knowledge of how Citadel’s circus works. It all relies on pumping tons of individual investor order flow into their internal systems, and using the lax regulations for those internal systems to do whatever the fuck they want with those orders, and all the information that comes with them.

Now: our orders are considered extra juicy for market makers and Wall St participants. Taking the other side of a trade is like a little, microseconds-long game of poker. You have some information about what is going on, and the other guy has some information about what is going on. You’re both placing a bet. If you know more than they do, it’s very likely you can make money off the situation. What Citadel does is choose opponents that don’t care about making an optimal bet. And then they pull out as many cards of whatever kind they want to maximize return.

They love to choose you. Why? Because you don’t care about what’s going on in the markets right this microsecond. You just like the stock. In fact, the BEST THING an individual investor can do is buy a good company and wait (i.e. DCA). So if you’re being smart, you’re acting as Citadel’s favorite thing: a completely blind opponent. There are lots of good trades to be made with our order flow.

So Citadel likes to stand between us and institutional investors like pension funds, and pocket a lot of the money that can be made. They steal from you and they steal from pensions, and they tell everyone how amazing it is that they provide such a service. They pay a lot of money to stand in the middle like that. Their business model depends very heavily on it. By absorbing so much of our order flow, they can say “oh we saved retail investors billions” (maybe half a cent per share) and make themselves look great. Because they are getting our juicy order flow and lit exchanges are not, they look better in comparison – and that lets them get even more order flow because they are the “superior” choice. But that superiority is an illusion. A quote from dlauer:

“Wholesalers are only able to provide price improvement because they have “first dibs” on any order they receive. They are the exclusive operator of a flash order facility in which they have a free option on every order.”

The core idea of the rule is this: “Hey, what if the pension funds just got to interact with individual investors directly? Institutions get better prices because middlemen aren’t taking a cut, and individuals get a better price because middlemen aren’t taking a cut.” In this scenario, Citadel loses billions.

And THAT is what the auction is. Every order needs to FIRST go to an auction where institutions and individuals can interact. EVERYONE gets to compete with Citadel, rather than Citadel keeping their own little system where they can take the other side of every trade.

Fuck the middlemen.

Wall Street Hates Competition

If there’s one thing Wall Street hates… it’s a fair fight. Citadel and their ilk have a near-monopoly on order flow: Broker-dealers route more than 90% of marketable orders of individual investors in NMS stocks to a small group of six off-exchange dealers, often referred to as “wholesalers … The wholesaling business is highly concentrated, with two firms capturing approximately 66% of the executed share volume of wholesalers as of the first quarter of 2022.”

And this is just the overall market. Within certain stocks, that monopoly might reach over 70%… or 80%. Or higher. A single wholesaler could control almost all the order flow for a particular stock on a given day. Could you imagine?

They hate fair competition because it means they could lose. They want riskless profit. And right now that’s exactly what they get, day in and day out. An auction takes a sledgehammer to their cushy current position.

Lots of lawyers are hard at work to make sure this rule never happens. Citadel’s lawyers, and Virtu’s lawyers, and Schwab’s lawyers, and Fidelity’s lawyers… any fund or firm that has their lips firmly latched onto the tit of the current market structure will be railing against this. And that is exactly what we have seen.

So how do we outplay these lawyers? Enter Title 15 U.S.C. 78k-1 of the U.S. legal code on the objectives of the SEC:

THIS is the line to push. This is their weakness because the facts are undeniable. So let’s push it.

 

How to Comment

1. Open your email. The SEC’s email is rule-comments@sec.gov. Copy/paste this title into the subject line: Re: Order Competition Rule, File No. S7-31-22, Release No.34-96495
2. Take a look at the talking points here: https://pastebin.com/25gxYr1j.
   1. These points include things like enforcement, calling out Citadel’s bullshit about benefiting retail investors, emphasizing fair competition and calling out the Citadel/Virtu monopoly, supporting the fact that the rule forces dark pools to be transparent, etc.
3. Copy and paste the ones you want.
4. Rephrase them / write more in your own words
5. Submit

Overall, we want to support the rule with one exception: The rule allows for orders to go to Citadel FIRST and then to the auction for fair competition. This still gives them a major information advantage which should be removed. So there is a point to be made about brokers first routing to the auction and only then, if someone doesn’t take your order, routing to Citadel.

Take the time to comment on this rule. This is an existential threat to Citadel AND any wholesaler that would take its place, were Citadel to fail. We don’t want another Citadel, we want the system taken apart.

So let’s get after it.